Sovereign defaults and international trade: Germany and its creditors in the 1930s

Abstract

This paper argues that international and domestic political economy factors are key determinants of creditor countries’ commercial policy responses to sovereign debt defaults. We illustrate this argument using a unique historical case study: the German external default of the 1930s. Our new historical narrative of this episode reveals that the various creditor countries adopted markedly different trade policy responses to the default depending on their degree of economic leverage on Germany and on the relative political influence of various interest groups within their domestic economy. These factors account for the pattern of Germany’s bilateral trade with the different creditor countries during the 1930s as well as for the differential treatment of various countries’ bondholders by the German government.

Keywords: sovereign risk, trade, creditor discrimination, commercial policy

JEL Classification: F13, F34, H63, N20, N40, N70